Deterministic Models for Postal Service Pricing

Abstract

The strong similarities between postal economics and public utility economics continue to be apparent in this chapter on the deterministic models of postal pricing. The underlying model is the deterministic peak-load problem. It is clear that postal service faces a peak-load problem in processing the large volumes of mail which arrive at the end of each day and which have only a limited window for processing in order to meet transportation and delivery deadlines. However, currently it is not feasible for postal administrations to charge different prices according to time of day. Thus, the application of traditional peak-load pricing principles is not immediately obvious. A form of peak-load pricing, called service-differentiated pricing, can accomplish similar smoothing effects to time-of-day pricing. By having two or more classes of mail (e.g., ordinary letters and bulk mail), differentiated according to processing and delivery standards, with associated price differences, the postal service provider can achieve the benefits of peak-load pricing through deferring processing of lower priority classes of mail at peak times. Determining optimal prices and processing capacities for this service differentiated environment is one of the principal goals of this chapter. We will first summarize the traditional peak-load literature before proceeding to develop our deterministic model of postal pricing and costing.